PACIFIC CURRENT GROUP LIMITED (ASX:PAC) - THE POISONED CHALICE
Announcement posted by Advocate Strategic Investments Pty Ltd 25 Oct 2016
ANATOMY OF A DISASTER PART 3
Pacific Current Group Limited (ASX:PAC) – The Poisoned Chalice
The Investment in Northern Lights Boutiques - Where Are They Now?
The Poisoned Chalice – the Northern Lights Boutique Portfolio – Two Years Down the Track
When Treasury Group Limited (TRG) and Northern Lights Capital Group (NL) merged on 25 November 2014, Northern Lights brought to the merger 13 funds management businesses, with total funds under management (*FUM) of A$24.2 billion.
In a notice to shareholders, TRG said, “It is expected that the merger will deliver significant strategic and financial benefits to TRG and its shareholders. The transaction is expected to be materially accretive from completion, deliver increased portfolio diversification and strengthen investment and distribution capabilities.” In our view as shareholders, nothing it seems can be further from the truth.
Since the tie-up with Northern Lights and BNP Paribas, TRG shareholders have seen close to $200 million wiped off the market value of their Company.
The Company needs to say more than just "simplifying the structure"(of its own making), will cure the $200 million of lost shareholder value!
Hollow sounding statements by a Company saddled with types more used to writing obscure private equity term sheets are a weak comparative, to a well articulated strategic imperative.
For the uninitiated, strategic imperatives, also known as strategic plans or business initiatives, are cross–functional in nature. Resources need to be allocated to the highest impact activities, and alignment of all contributing activities needs to be made and which, bear no resemblance to a monopoly type unit, locked up in an opaque trust.
When the merger was first announced, in August 2014, the Northern Lights assets were as follows (all amounts in A$ unless otherwise stated):
• Aether
A private equity fund-of-funds focused exclusively on real assets and related sectors.
Funds under management stated by TRG: $1 billion. TRG reported in the financial observer on 6 August 2015, Aether represented a third of Northern Lights earnings.
http://www.financialobserver.com.au/articles/treasury-group-deal-widens-us-distribution
• AlphaShares
Provider of a range of Chinese equity exchange-traded funds (ETFs), based on the work of the firm’s chief investment officer, author and Princeton professor, Burton Malkiel.
Funds under management were stated by TRG: $376 million.
• Blackcrane
Equity manager offering concentrated all-cap global equity funds.
Funds under management stated by TRG: $3 million.
• Del Rey
International value-style equity manager.
Funds under management stated by TRG: $833 million.
• EAM
Equity manager offering U.S., global and emerging market small-caps and micro-caps.
Funds under management stated by TRG: $1.1 billion.
• Elessar
US small-cap specialist equity manager.
Funds under management stated by TRG: $112 million.
• Goodhart Partners
London-based specialist multi-product asset manager – Japanese equity and emerging markets equities.
Funds under management stated by TRG: $427 million.
• Nereus
Indian-based private equity boutique focused on renewable energy infrastructure. No FUM stated.
• NLAA
Hedge fund seeding vehicle.
Funds under management stated by TRG: $268 million.
• Raven
Private equity firm focused on asset-based lending.
Funds under management stated by TRG: $254 million.
• Seizert
US equities specialist.
Funds under management stated by TRG: $5.7 billion.
TRG reported in the financial observer on 6 August 2015 Seizert represented 41% of Northern Lights earnings.
• Tamro
US small cap equities specialist.
Funds under management stated by TRG: $2.2 billion.
TRG reported in the financial observer on 6 August 2015 Tamro represented 10% of Northern Lights earnings.
• WHV Investment Management LLC
An intermediary investment platform, providing access to US mutual fund structures, in-house and external manager strategies.
Funds under management stated by TRG: $11.9 billion.
TRG reported in the financial observer on 6 August 2015 WHV represented 17% of Northern Lights earnings.
Almost two years down the track, let’s check in on the status of this boutique portfolio.
• Aether Investment Partners LLC (100% equity?)
Considered one of the five core boutiques in the PAC portfolio, Aether’s FUM has grown by 50 per cent, to $1.5 billion. Aurora Trust owns 100 per cent of Aether’s ordinary equity. However, there may be other types of securities on issue or undisclosed liabilities. Aether’s contribution to PAC’s earnings, are unknown.
Website:
SEC Registration and ownership:
• AlphaShares LLC (31.03% equity)
The Company’s office in Walnut Creek CA USA is closed and the phone is disconnected. http://www.alphashares.com/index.html
AlphaShares licenses its four proprietary indices – the AlphaShares China Technology Index, AlphaShares China Small Cap Index, AlphaShares China Real Estate Index and AlphaShares China All Cap Index – to Guggenheim Investments, which uses them in four New York Stock Exchange-listed exchange-traded funds (ETFs), namely the Guggenheim China Technology ETF (NSYE Arca ticker CQQQ), Guggenheim China Small Cap ETF (NSYE Arca ticker HAO), Guggenheim China Real Estate ETF (NSYE Arca ticker TAO), Guggenheim China All-Cap ETF (NSYE Arca ticker YAO).
All FUM seems to belong to Guggenheim Investments which presumably pays a licence fee to use the AlphaShares indices?
AlphaShares is named in the Aurora Trust FY16 accounts as being one of the Trust’s “portfolio companies” of which “changes in the assumptions used in establishing the appropriate carrying values” contributed to the Trust’s $121.4 million worth of impairments. The Trust recorded a $3.03 million write-down for AlphaShares: the accounts give the level of ownership of AlphaShares as 31.03 per cent.
The Aurora Trust FY16 annual report lists a 31.03 per cent ownership interest in AlphaShares – but AlphaShares as a firm appears to be defunct. The telephone number given on its website at http://www.alphashares.com/ has been disconnected. The most recent press release on the website was posted in September 2011; the most recent newsletter is dated March 2013. All of the personnel named on the website are now at new firms.
In any case, as mentioned above, the “FUM” of $376 million claimed in the Treasury Group ASX release was never FUM of Treasury/Pacific Current: it was the FUM of Guggenheim Investments.
Alphashares contribution to PAC’s revenue and earnings are unknown
Website:
SEC Registration: Terminated 31 March 2011
• Blackcrane Capital LLC (25% equity)
Still owned (25 per cent), Blackcrane is listed as one of the “growth” boutiques of the group. At 30 June 2016 its FUM was $350 million – up one-hundred-fold since the merger.
Blackcrane’s contribution to PAC’s revenue and earnings are unknown
Website:
SEC Registration:
• del Rey Global Investors LLC (*31.25% equity)
Del Rey is closed for business?
del Rey seems to have disappeared from the portfolio. It was last mentioned in a FUM update announced to ASX on 29 July 2015, which stated that in the quarter to 30 June 2015 there had been “net US retail outflows of $168 million primarily due to outflows at del Rey,” with the additional statement that “Aurora’s economic interest in del Rey’s results is not material to the portfolio overall.”
Three months later, in the FUM update for the quarter to 30 September 2015 there was no mention of del Rey.
Prior to the Northern Lights/Treasury Group merger, NLCG owned 25 per cent of del Rey Global Investments. Gerald W. Wheeler, co-founder of del Rey, and at the time, its chief operating officer and chief compliance officer, brought an action in the Superior Court of California in October 2014, suing Northern Lights Capital Partners LLC and Northern Lights Capital Group LLC for breach of contract, and sued Treasury Group Limited claiming “intentional interference with contractual relations,” claiming he had a Right of First Offer (ROFO) with respect to any contemplated sale of del Rey’s Common Units, and that NLCG breached this obligation by entering into a merger agreement with Treasury Group without first providing Wheeler with an opportunity to exercise his ROFO.
The intention of NLCG and Treasury Group to merge was publicly announced on or about 5 August 2014: Wheeler claimed that he was unaware of it until a conference call with NLCG co-founder Paul Greenwood on or about 6 August 2014. This suit was served on NLCG in November 2015. The suit was dismissed in September 2015.
It does not appear that Treasury Group Limited/Pacific Current Limited shareholders were ever informed of the filing of the suit, or its dismissal. Presumably being sued is material news?
The del Rey matter raises serious disclosure questions.
Website:
SEC Registration: Terminated
• EAM Global Investors (EAM) LLC (Nil Equity)
With a non-equity ownership structure EAM is listed as one of the “growth” boutiques of the group. On 25 March 2016 FUM of $108 million was recorded with the SEC. At 30 June 2016 PAC disclosed its FUM was $440 million and was listed as having a value of $14.5 million.
EAM, it seems to us, never had anything like the $1.1 billion of FUM TRG told its shareholders there was in the merger announcement on 5 August 2014 and raises serious disclosure questions.
EAM’s contribution to PAC’s earnings and income are unknown.
Website: See EAM Global Investors investment product(s) list @ http://www.eaminvestors.com/
SEC Registration:
Filings:
• Elessar Investment Management LLC (0%equity?)
Sold? No disclosure to PAC shareholders about business having been sold.
In January 2015, Elessar – which press reports at the time said managed US$66 million – was bought by Emerald Asset Management, Inc., an investment management holding company with about US$3.2 billion in assets. TRG/PAC shareholders were never told that this had happened.
Elessar’s contribution to PAC’s earnings and income are unknown.
The Elessar sale raises disclosure questions.
Website: See Emerald notice of acquisition http://www.teamemerald.com/news/elessar-investment-management-team
SEC and State Registrations: Terminated between the years 2012 thru 2015
• Goodhart Partners LLP (18.81% equity)
Still owned (18.81 per cent) through Northern Lights Capital Partners (UK) Limited (See SEC doc dated 30 August 2016)? Not listed by PAC as a core boutique or a growth boutique. Presumably Goodhart is one of the “other” boutiques, combined, which have total FUM of $2.56 billion as at 30 June 2016.
In a brochure dated August 2016, Goodhart gave its assets under management (AUM) figure as US$702.04 million.
Goodhart’s contribution to PAC’s earnings and income are unknown.
SEC Registration:
• Nereus Capital LLC (50% economic interest?)
On 21 August 2015, Treasury Group and Northern Lights Capital Partners announced a joint investment, of an undisclosed amount, in a bespoke investment vehicle, Nereus Capital Investments (NCI). The announcement read that “Aurora will make a small initial equity capital investment in NCI, but will provide a contingent commitment of up to US$25 million, which can be called no sooner than the sixth anniversary of the signing of the deal,” that is, August 2021. http://www.asx.com.au/asxpdf/20150821/pdf/430p6kxmys40hg.pdf
On Nereus’ website at www.nereuscapital.com, no staff members are listed, no telephone number is given and the most recent of what press articles carried dates from August 2014. There is no indication of FUM – or indeed, if there is any.
In the Aurora Trust accounts, the Nereus investment has been written down by $25.7 million over FY15 and FY16 – by $11.2 million in FY16 – and has a negative mark-to-market valuation.
Nereus’s contribution to PAC’s earnings and income are unknown.
There are serious disclosure questions about this investment.
Website:
SEC Registration:
None
• Northern Lights Alternative Advisors LLP (NLAA) (20% equity)
The firm was established as Buick Capital Partners, in 2009, and was renamed to Northern Lights Alternative Advisors (NLAA) in 2014, when Northern Lights Capital Group (NLCG), acquired a minority stake. Still owned (20 per cent). The Aurora Trust recorded a $369,815 write-down for NLAA in FY16. There is no indication of FUM.
Website:
UK Companies House: https://beta.companieshouse.gov.uk/company/OC341896/filing-history
NLAA’s contribution to PAC’s earnings and income are unknown.
SEC Registration: None
• Raven Capital Management LLC (25% equity)
Raven was listed as one of the “growth” boutiques of the group. At 30 June 2016 its FUM was $760 million, which has tripled since the merger.
The sale of the Raven interest was announced to the ASX on 17 October 2016 in questionable fashion after PAC’s Aurora Trust wrote off $1.2 million in receivables due from Raven and recorded a $9.6 million write-down against the investment in FY16.
There are serious questions to be answered about Raven. None more so than about the write down of asset value and writing off of current receipts.
Website:
SEC Registration:
• Seizert Capital Partners LLC (Equity?)
As previously reported to PAC’s shareholders, the PAC Aurora Trust owns 50 per cent of the ordinary equity in Seizert, together with preference shares that give entitlements to a share of Seizert’s income (current position unknown).
The US equities specialist was touted as one of the jewels in the crown of the Aurora Trust-owned boutiques, and a core boutique holding. But FUM has struggled, down from $5.7 billion when brought into Aurora Trust (as a Northern Lights boutique) to $4 billion. As a result, Aurora Trust has written down the carrying value of Seizert by $85.3 million at 30 June 2016.
Seizert Capital Partners was heavily promoted to Treasury Group/Pacific Current shareholders as a high-quality equities manager around which the combined business would be built. Founder Gerry Seizert was introduced at the 2015 AGM as Tim Carver took shareholders through the basis of building a business with Seizert.
However, at 30 June 2016, the board tells Pacific Current shareholders that because of outflow of funds under management at Seizert, the carrying value of Seizert has to revised down by $76 million. By the time the Aurora Trust accounts are released this has become $85.3 million – representing the write-off of more than half the value of Northern Lights’ entire contribution to the merger, in less than two years.
This is after Treasury Group shareholders effectively paid out the US$48 million loan with which Northern Lights had bought Seizert – Aurora Trust used the proceeds of the sale of (Treasury Group boutique) RARE Infrastructure to pay this debt.
The Pacific Current FY16 annual report states that “the biggest challenge we faced during the year were headwinds at Seizert. The decline in Seizert’s FUM has been brought on by recent underperformance and the declining appetite for active US equity strategies.” It goes on to say that, “with the benefit of hindsight, we clearly overpaid for this asset, and the attrition in Seizert FUM has offset much of the progress being made across the broader portfolio.”
Ord Minnett the broking house which covers PAC stated in its research report dated 1 September 2016: “Assessment of Seizert – removed from SOTP
We have assessed Seizert’s performance across its funds, finding under-performance on one, three and five terms for all. We have cut our expected profit for the manager materially for FY17 and removed it from our sum-of-the-parts.”
Seizert’s contribution to PAC’s earnings and income are unknown.
Website:
SEC Registration:
• TAMRO Capital Partners LLC (24% equity)
SEC Registration terminated on 21 march 2016 raises disclosure questions.
Still owned (24 per cent), presumably TAMRO is one of the “other” boutiques, which have total FUM of $2.56 billion as at 30 June 2016. The Aurora Trust recorded a $1.7 million write-down for TAMRO in FY16.
Tamro’s contribution to PAC’s earnings and income are unknown.
Website:
SEC Registration: Terminated 21 March 2016.
FINRA Broker Registration: Not Licensed?
• WHV Investment Management LLC (0% equity)
WHV was a profit-share arrangement with an intermediary investment platform, so it never had $11.9 billion of FUM to bring to Aurora Trust: it was more like funds under advice (FUA) or at best a funds distribution arrangement (FDA), which are very different things. In any case, the WHV investment of $16 million was written off by Aurora Trust on 30 June 2015, just seven months after the economic interest was acquired. In the FY15 Annual Report of Treasury Group, shareholders were told that the company’s share of the WHV write-down was $10.8 million.
Website: Reflects wind up.
SEC Registration: Terminated 29 July 2016
In summary, the assets brought into the merger by Northern Lights have given the Aurora Trust – and by extension, the merged entity of Pacific Current Limited – just under $137 million worth of impairments, in less than two years, while the net FUM went backwards.
Some of that should never actually have been stated as FUM. The revenue margin on FUA situations is very different to that on FUM.
The due diligence conducted by Treasury Group Limited on its proposed merger partner(s), seem to us, as being extremely poor – that is, if any due diligence was conducted at all!
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We have asked the Company for information and have been told by PAC's Corporate Counsel and CCO operative, we have no right to ask or see.
As a constructivist equity investment manager, ASI will be engaging with the board and executive of Pacific Current Limited more earnestly to suggest strategic, operational and governance changes that it believes could help the broader stock market to understand better the Pacific Current Limited business, and thus begin to redress the steep valuation discount currently being applied.
ASI maintains that both Pacific Current Limited and Aurora Trust are, as constituted at present, deliberately opaque with respect to their accounts and the operating performance of their assets, to the extent that shareholders cannot discover the true economic performance of their investment in Pacific Current Limited. Thus shareholders cannot have any confidence in the board and management of Pacific Current Limited with respect to redressing the dismaying loss of shareholder value since the company struck what ASI believes to have been a poorly thought-out merger. ASI has also questioned the scope of the company’s audit, and the independence of the auditors, given the related advisory fees paid to the firm in 2014-2015.
ASI will engage with Pacific Current Limited in a constructive manner. It will continue to seek answers to specific questions that have been put to the Company which has been mostly ignored and others as they arise.
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About ASI
ASI is a Melbourne-based independent investment management firm that provides institutional and sophisticated investor clients with customised alternative investment strategies. The firm’s senior investment team uses its unique, company-specific, value-oriented investment approach, with a strong focus on equity special events and credit opportunities. ASI’s approach is focused on the preservation of capital through extensive and rigorous investment analysis on a position and portfolio basis. ASI is the manager and adviser to the Advocate Partners Constructivist investment strategy. Shareholder constructivism is about advocating an owner’s perspective in relation to how a public company is governed and operated, in order to build the conditions necessary for its equity value to appreciate.
Disclaimer
This Press Release has been prepared by Advocate Strategic Investments Pty Ltd ABN 77 101 691 598 AFSL 224560 (ASI) for the information of shareholders. This release has been prepared from information available to ASI on the date of release and from publicly available sources. ASI has not verified this information and no responsibility is accepted for the accuracy, currency or completeness of this information. This release must not be taken to be financial product advice in respect of shares in the Company.
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